Business Insights

Buying a business? Here’s what to know.

Taking over an existing business can make sense if you know what to look for.

Maybe a family member or friend is ready to sell. Perhaps your boss wants to pass the baton to you, their trusted successor. Or you’re keeping an eye on that shop or restaurant you love so much.

According to Zach Turner, SBA Small Dollar Specialist at Regions Bank, there are plenty of advantages to buying an existing business instead of starting from scratch.

“It’s often a smart move to take over ownership of an existing business,” Turner said. “You’re not just buying a name. Most times, you’re also getting a customer base, a location and an established brand, too.”

However, in the heady rush of becoming your own boss, remember that success is not a guaranteed part of the bargain.

If you’re buying an established business, some things won’t come with the sale. Institutional knowledge, as one example. Customer relationships are another, especially if you’re not a current employee. Then there are all the nagging operational details not found on any balance sheet.

According to Turner, there are critical things to ask the seller—and to ask yourself—before making any offer and especially before you put out the Under New Management sign.

Know what you don’t know.

There’s a lot involved in owning a business. And even the best prepared would-be entrepreneur can’t ever know everything.

If that’s you, relax. It’s okay, as long as you are willing to take the learning curve seriously as part of the job.

Bridging knowledge gaps, then, becomes your most urgent priority. Long before you sign on the dotted line, finding a mentor and recruiting a bench of experts should be your very first step.

“As one example, if you don’t know accounting, it’s essential to find someone who can assess the value of a business and knows what to look for in the seller’s books,” Turner said. “At the same time, always have an attorney who understands business, too. Having those two for advice can keep you out of trouble. That makes them almost always worth the expense.”

Beyond legal and accounting, there’s plenty of other expertise you’ll need. Marketing. Managerial. Payroll.

One great source of wisdom is SCORE (Service Corps of Retired Executives), an organization that provides free mentorship and education for entrepreneurs. With 10,000 volunteers across all 50 states, SCORE can give your business planning a leg up—plus the advice any smart entrepreneur would find indispensable.

Another fantastic place to turn are the Small Business Development Centers (SBDCs) offered through the Small Business Administration. SBDCs provide counseling and training to small businesses, supporting both business start-ups and the expansion of existing businesses.

At the same time, it’s also a good idea to bring a small business banker onto your team. If one isn’t in your contacts, there’s no better time than now to find a banker who can become your friend and financial ally. Because, as Turner puts it, “The earlier in the process you have a sounding board for your financing needs—as well as the options available to you— the better off you’ll be.”

Further, make education a regular entry on your calendar. Join the local chamber of commerce. Attend seminars. And stay current on the shapeshifting world of business, finance and all the digital tools at your disposal.

One other possibility? Check out Regions Small Business Insights, an entire library of articles with tips on how to make your business stronger.

After all, entrepreneurship is a marathon, not a sprint. Ongoing education should be part of your program to keep your business in tip-top shape.

Do you understand this business?

Whether you’re buying a restaurant, a retailer, or a specialty business such as a small manufacturer, specific industry knowledge is critical.

“It’s so important to make sure the business fits your background in some form,” Turner advised. “As one example, lots of people want to start restaurants without any restaurant background. There’s no substitute for that experience, especially when you seek any kind of small business loan.”

If you already work for the current owner, you have the distinct advantage of knowing the systems, the customers and the market. If not, it’s time to add skills and knowledge to your resume. That gives you the right knowledge and experience when it’s time to buy.

Before you bite, crunch the numbers.

It’s vital to understand the business’ financials backwards and forwards. That means taking the time to truly scrutinize financial records. Otherwise, what you don’t know could really hurt you.

The research should be far more involved than simply glancing at the balance sheet and income statement. It’s digging deep into obligations, client agreements, leases, and a good deal more. What should you—and a qualified financial professional—comb through before making an offer?

• Past financial statements, including tax returns, balance sheets, and cash flow statements
• Sales records, accounts receivable, accounts payable, debt disclosures, and advertising costs

One yellow flag? Some owners, especially those chasing dreams of retirement, may be letting things slip for no other reason than fatigue. That means paying careful attention to the trajectory of the past several years and months to ensure you’re not buying a business in decline.

“It’s more common than you think,” Turner added. “An owner might see the sale of their business as their last step before retirement—a time when they recognize they simply can’t keep it running up to their previous standards.”

And, when talking turkey, watch out for an owner overvaluing their life’s work. Again, due diligence with the help of a qualified accountant can help get you through that tricky phase of negotiation.

“Remember the current owner might be overvaluing the business based on personal feelings,” Turner pointed out. “Not having command of that with a preemptive valuation before starting the negotiations could hinder the process or change the dynamic.”

Write. It. Down.

Tempting as it may seem, there should be no such thing as a handshake deal, even if you’re buying from a family member. It’s a well-known axiom that even the most well-intentioned can have misunderstandings. And memories of verbal agreements almost always grow dim over time.

“It’s so important to understand what everybody wants in a transaction,” Turner pointed out, “and what the expectations are. The more you write down, the lower your chances for a disagreement a month or several years down the road.”

The best measure to take? Spell everything out in contracts and terms of agreement. Who is expected to do what, how much you’ll pay and when, what your payment secures of the company’s assets, and the former owner’s role in helping the new owner enjoy long-term success.

Don’t overlook the importance of relationships. Keep an amicable relationship with the former owner after the sale. Their knowledge may prove your most valuable asset for maintaining key accounts. At the same time, it helps to have that resource when your new business hits an unexpected snag. The better your relationship with the previous owner, the better your odds for navigating problems when times get tough.

Don’t starve for cash

When you own a business, you need cash flow. Without it, your adventure in business ownership won’t last long.

One advantage of buying an existing business over starting from scratch? You’ll walk into the enterprise with a slate of accounts. In turn, that translates into having accounts receivables and that all-important cash flow.

Even so, you can’t bank on a steady intake of revenue the minute you take over. Or you might need to make essential purchases of equipment or offer incentives to key team members to keep them around. It’s simply good business to be prepared.

“Can you tap three to six months of working capital for operational expenses?” Turner asked. “It’s important that you have the financing to get through the inevitable lean times.” Whether a conventional business loan or funding the purchase through an SBA loan, this working capital reserve can and should be part of your financial plan.

What’s more, be prepared to seek alternative forms of finance. An early discussion with a business banker will help determine if you’re a good candidate for a conventional loan or an SBA loan. Or you may need to take a different route. Some of those include tapping into the equity of your home, reaching out to family members for support, or finding investors.

Owner financing may prove an option, too. However, Turner sees yellow flags to an owner acting as your bank.

“Sometimes it’s a good idea,” Turner noted. “Just know that if the owner is offering to finance the purchase, there may be a reason behind it. The books might not be strong enough to go through a full-bore business valuation and the detailed requirements that go with conventional or SBA lending.”

Whatever form your financing takes, having enough working capital should be your first goal, not an afterthought. As the saying goes, better to have it and not need it than need it and not have it.

And once you acquire the business, monitoring cash flow becomes your most important priority. Ensuring you have a steady flow of money coming in—while keeping tabs on the money going back out the door—will likely prove the difference between success and failure in those crucial early months of ownership. Fortunately, there are tools to help. As one example, ask about Regions CashFlowIQ ®, an easy-to-use system that helps you pay vendors (B2B bill pay), invoice customers, provide additional levels of security, and automate accounts receivable and payable processes.

So how can your business purchase be successful? With an almost infinite number of possible transactions, there’s no set formula for success. However, regardless of what the math might be on your purchase, solid collaboration with your business banker should be part of any equation.

Need examples? Straight from Regions SBA lending files, here are a couple of success stories.

Case study: Webster-Kirkwood Times

What happens when a local newspaper publisher is ready to take himself out of circulation and enjoy retirement? In the case of the Webster-Kirkwood Times, a community newspaper in the St. Louis area, that was approaching his employees with an offer to sell.

Kent Tentschert, Randy Drilingas, and Jaime Mowers knew a lot about running a newspaper. Running a business, however, proved unfamiliar territory.

As Drilingas put it, “We had no idea whatsoever what it was like being a business owner. We didn’t know what the business side would be like aside from getting the paper out each week.”

However, when approached by the owner, the three recognized the opportunity. While the purchase was owner-financed, one team member enlisted the help of a family member for additional capital.

It helped that the three trusted one another—and the seller—to forge a deal that everyone liked.

“It felt like one big giant jigsaw puzzle we worked on for months,” said Mowers. “We put in countless hours of meetings. We would go over to Randy’s back yard constantly and we would have these meetings. Things were changing all the time, and we were trying to figure out how we could make this work.”

The result of all that preparation? A smooth ownership transition, helped in large part by ongoing and honest conversations with the owner.

“I think he could have made a lot more money selling the paper outright,” Tentschert added. “But he wanted it to succeed. So, he helped us understand what we needed to make each week, a breakeven number, and we built off that.”

Because of these candid discussions with a motivated seller, the accounting and legal work came after the terms were ironed out.

The paper thrived in the aftermath of the sale. The owners brought in an exceptional sales team, which was essential to the newspaper's success. At the same time, they made another critical move and chose the Webster Groves Branch of Regions as their business bank, relying on the advice of Danny Sigman and his team.

“We weren’t happy with our bank at the time,” Tentschert added. “So, we decided to try someone new and close. We met Danny and he got everything going right away.”

After a few years bolstering their entrepreneurial skills, that relationship with Regions became even more valuable. The Webster-Kirkwood Times team decided it was time to buy out their fourth partner—the family member who helped with financing—and Sigman stepped in with a strategy.

“We met with Danny and he recommended an SBA loan as our best route,” Tenschert continued, “and just made it easy with everything we needed to do. He answered all our questions and helped wherever he could. He quickly became part of the team.”

Sigman, for his part, helped the Webster-Kirkwood Times team anticipate any potential snags in SBA application process.

“A lot of detail needs to go into an SBA application,” Sigman said. “Working with Zach Turner, our SBA specialist, we were able to make sure there were no questions when it came time to apply.”

The result? Today, Tentschert, Drilingas, and Mowers are the full owners of the Webster-Kirkwood Times, making it the paper they’ve always dreamed of publishing.

“Community newspapers provide the information you can’t find anywhere else,” Mowers said. “I would add that being able to continue the legacy of the community newspaper and being appreciated by the community is an honor and a privilege.”

Case study: Lookout Valley Chiropractic

Many healthcare providers dream of the day they can own their own practice. And Dr. Joshua Wheeler was no exception.

Several years after joining Lookout Valley Chiropractic, near Chattanooga, Tennessee, Wheeler was approached by the practice owner about a potential purchase. As someone who knew the patients, had a trusting relationship with the staff and already knew the systems in place, Josh recognized a good opportunity when he saw it.

“I was already integrated and knew every patient and staff member,” Wheeler said. “It was probably the best scenario. You’re not just buying the office. You’re already familiar with how the business works.”

Wheeler chose to take the initiative. He approached George Clark, his Regions banker at the South Broad branch, and started the loan process.

“I knew George from banking there, so it wound up working out,” Wheeler said. “I walked in and explained my situation. George immediately set me up with Regions’ SBA team. Within a day or two, we were meeting with Zach about getting an SBA loan.”

One of the challenges was the heavier documentation typically needed to meet SBA requirements. Yet, as Clark notes, preparation made a substantial difference when it came to keeping things moving on a timely basis.

“We first began the conversation with Josh in October. He was very well prepared with his financial information, and really did the work getting what was needed. We did meet a delay or two, chiefly due to needing several years of financial statements from the practice owner.”

As a result of laying the right groundwork, the SBA loan was approved within three months, paving the way for a closing in mid-January.

“Everything went smoothly,” Wheeler noted. “I was motivated to get everything to Regions within 24 hours of our meeting. However, it always takes longer than you think it’s going to take. My goal was January 1st, so we got pretty close.”

Wheeler pointed out that the right relationship makes all the difference. “If you don’t have a bank you trust, it makes it much harder. Regions was there for me from Day One.”

And how is it going for Wheeler and his team today?

“Every week, I feel more comfortable,” he said. “Those fears and anxieties I had about owning a practice are going away.”

That’s the kind of outcome we like to see. Proof of what can happen when your put your dreams in good hands.

Considering a small business purchase? Look before you leap. However, with the right due diligence and the right banking support, you can make your entrepreneurial dreams come true.

See the Small Business section of Regions.com to learn more about the bank’s free, personalized Regions Greenprint® plan and other services, insights and tools to help you start your business journey.